Commonwealth Bank of Australia thinks it could lose $3 billion if house prices collapse

Why the Commonwealth Bank of Australia (ASX:CBA) believes there is no housing bubble.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Commonwealth Bank of Australia (ASX: CBA) reported its 2018 half year results which were quite interesting to go through, you can read a summary of these results here.

What I found particularly interesting, was the bank's view on the housing market. As you would expect, the bank says that typical housing bubble factors are "not evident in Australia". Some of these factors sighted by the bank include:

  • Unsustainable asset prices particularly when artificially inflated by speculative investing
  • Strong loan volume growth driven by relaxed lending standards
  • Interaction of high debt levels and high interest rates
  • Domestic economic shock which would be a trigger for a price correction

Essentially what CBA is saying is that given speculative investor loans are limited by APRA's latest regulatory changes, then there probably will not be a significant price correction, especially as interest rates and unemployment are low.

The problem is, it's not too difficult to imagine a scenario whereby interest rates do rise significantly (CBA is currently forecasting rates to remain constant in 2018 and a 0.5% rise in 2019).

I think investors should focus more on the bank's stress testing and how that develops in future reports. In the bank's current stress scenario of a 31% house price decline, 11% unemployment and a reduction in the cash rate to 0.5%, it would incur cumulative losses on its home loan book of $3 billion over 3 years.

Interestingly enough, the bank estimates that in that scenario, the RBA would drop the cash rate from the current rate of 1.5% to 0.5%. My interpretation of that is that the bank is saying while there are some systemic risks, the government and regulators would intervene to save the day should the worst happen.

Overall, with a cash ROE of 14.7% which could have been higher had it not been for the Austrac fines, I still think that CBA has a role to play in some portfolios. Investors will just need to keep following the risks and how they develop over time. It will be interesting to see what National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) report in their next update.

Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned. You can follow Kevin on Twitter @KevinGandiya. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »